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Fed looking at modes of preventing abusive mortgage lending practices

WASHINGTON - Federal Reserve Chairman Ben Bernanke says the central bank is considering tougher rules to crack down on abusive practices by mortgage lenders. But he says the economy should escape without significant harm from the problems in the subprime market.

Facing criticism from members of Congress about lax regulation, Bernanke said Thursday that the Fed was reviewing all of its options from bolstering disclosure requirements on what lenders must tell prospective borrowers to writing tougher rules to guard against fraud.

''We at the Federal Reserve will do all that we can to prevent fraud and abusive lending and to ensure that lenders employ sound underwriting practices and make effective disclosures to consumers,'' Bernanke said in a speech to a banking conference in Chicago.

Bernanke, who served as President Bush's chief economic adviser before taking over the Fed post in February 2006, said regulators needed to be sure that any rules they imposed did not stifle the market for legitimate loans.

''In deciding what actions to take, regulators must walk a fine line,'' he said. ''We must do what we can to prevent abuses or bad practices, but at the same time we do not want to curtail responsible subprime lending or close off refinancing options that would be beneficial to borrowers.''

He said that while it was likely there would be further increases in mortgage delinquencies and foreclosures this year and in 2008, he did not believe these problems would be enough to derail the overall economy.

''We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system,'' Bernanke said. He said in answer to a question that he believed the financial system would be able to absorb the losses from the subprime mortgage loans that go bad without major difficulties.

Bernanke's comments represented his most extensive review of the troubles in the subprime market since the Fed and other banking regulators came under criticism from members of Congress earlier this year. The lawmakers said the regulators were not doing enough to halt abusive practices in the subprime market, which provides loans to people with weak credit histories.